Viability of Affordable Housing Threatened

Sep 01, 2007

Hundreds of affordable apartment communities built using Low Income Housing Tax Credits (LIHTC) are in financial jeopardy due to a combination of significantly increasing operating and utility costs and stagnant rents, according to a recent NAHB study.

The study found that in some areas of the country rents at tax-credit properties have been frozen for the past five years, says Paul Emrath, Ph.D., NAHB assistant staff vice president for housing policy research, who led the study.

Emrath places most of the blame for the havoc on changes in data used by the Department of Housing and Urban Development to calculate income limits, rather than real declines in the income of residents living at these properties.

“HUD switched from one data source to another for its calculations. The result has been downward adjustments in income limits and rents in most areas of the country,” says Emrath.

NAHB found nearly 200 counties across the country where flat income limits had completely frozen rents at tax-credit properties since 2001. Meanwhile, operating costs across the country have risen by an average of 27%. Further complicating the problem for tax-credit property owners, says Emrath, is the fact that they must subtract a “utility allowance” from their net rents received from any residents who pay their own gas, electric or water bills.

While national data on utility costs at LIHTC properties are not collected, NAHB did collect data from member developers. One developer provided data from a property in Washoe Co., Nev. — located in the Reno-Sparks area — that showed the utility rebate to residents rose 49.2% from 2002 to 2007, while HUD recorded a 19.6% rise in rental property operating costs in the state during the same period. For that developer's project, net rents over the five-year span declined 1.6%.

‘A Catch-22’

The LIHTC program is critical to meeting the nation's housing needs. The program works by offering tax incentives that allow developers to raise equity for projects that otherwise wouldn't be financially viable.

In return for those tax incentives, however, tax credit developers and owners agree to keep rents significantly below market levels, in order to serve households earning at least 60% less than an area's median income. Those restricted rents are determined by the “income limits” HUD sets for affordable housing programs.

“It is definitely a Catch-22,” says Steve Lawson, an affordable housing developer from Virginia Beach, Va., and chairman of NAHB Multifamily's Housing Credit Group, which represents private owners and developers of tax-credit properties. “The very income restrictions meant to ensure that these properties are available to serve people in need of affordable housing are actually threatening the long-term sustainability of many of these projects.”

Speaking before a House Ways and Means subcommittee about the problems of HUD's data switch, Lawson called on Congress to consider solutions, including indexing restricted rents to inflation.

Curious data differences

This year's HUD estimates of income limits cite that median family incomes declined in more than 75% of the country, thus more than two-thirds of the nation will see no increase in rents. Yet, the American Community Housing Survey shows median family income in the country increased by 4%.

In his testimony, Lawson said this disparity “constitutes a complete disconnect between the methodology and the real world” and that problems caused by the data-related changes will keep LIHTC rents frozen in many areas for years to come.

NAHB calculated a “critical gap” to see how far HUD's median family income estimate in an area must increase before the income-rent limits also start to increase. NAHB found that 1,748 counties had a critical gap of at least $1,000. Under HUD's current system of calculating income limits, the majority of those counties will see little or no increase in allowable gross rent for LIHTC properties in 2008.

In more than 700 other counties, the critical gap is at least $2,000; in 175 other counties, it is at least $4,000, and in 48 counties, the gap is $6,000. In extreme cases, some counties are looking at flat income limits — and therefore flat tax-credit rents — for the next decade.